Posted
by
Soulskill
on Saturday June 12, 2010 @09:25AM
from the skynet-needs-some-green dept.

Mr_Blank writes with this excerpt from an article at MIT's Technology Review:
"The ability to predict the stock market is, as any Wall Street quantitative trader (or quant) will tell you, a license to print money. So it should be of no small interest to anyone who likes money that a new system that works in a radically different way than previous automated trading schemes appears to be able to beat Wall Street's best quantitative mutual funds at their own game. It's called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes — and it never holds a stock for longer."

It's been said before, and I'll say it again. You should ban anyone buying a stock and then selling it within timeframe x (where is 1 week/6 months/1 year). Anything to cut down on the insane bullshit.

Why? How? By what authority? The free market is better than anything else - unless you like a system where they say "ok... we'll protect the little guys by setting up a tier system. If your portfolio $5,000,000,000 then you have to wait six seconds. Everybody in the middle, 1 month."

Why? How? By what authority? The free market is better than anything else - unless you like a system where they say "ok... we'll protect the little guys by setting up a tier system. If your portfolio $5,000,000,000 then you have to wait six seconds. Everybody in the middle, 1 month."

By what authority? In the USA stocks are regulated by the Securities and Exchange Commission, part of the federal executive branch. Other nations have similar regulatory/enforcement agencies. Please tell me that you aren't really this ignorant about a subject you've decided to comment on?

As others have pointed out, stocks and bonds and other securities are meant to be investments, not gambling. Treating them as one big casino is the behavior that tends to destabilize an economy, especially by favoring short-term gain at all costs - even at the cost of severe long-term loss. Witness the housing bubble. It was precipitated by speculators who bought property they had no intention of living in because they hoped to resell them at higher prices. Housing prices cannot keep going up forever, especially not when at the same time banks cause foreclosures by deciding that credit worthiness is no longer important when determining eligibility for loans. None of this would have been such a big deal if all of the people buying the homes intended to live there indefinitely.

What do you think happens when you treat American corporations the same way, as one big casino, and come up with new and better tools to help you do your gambling? There are network effects and not many people seem to want to consider them.

Any security isn't meant to be anything but what the market thinks it is. Any security is subject to movement, which may include up and down, otherwise it'd be pointless to have a "market". Trading isn't Gambling. If anything, buy&hold is gambling like nothing else, because it subjects itself to the arbitary passage of time in the blind (sometimes unfounded) hope a security will rise. Buy&Hold is the ultimate form of gambling, trading is just applying risk mitigating strategies (such as getting out,

The economy as a whole isn't a zero sum game. I invest some money in a company, it makes something of value and increases the overall size of the economy and (rightly) pays dividends.

20 minute speculative bets are zero sum. In 20 minutes nothing of value was created. When I buy something for a $1 and then sell it for $1.01 twenty minutes latter I'm not growing the economy, I'm taking $0.01 from someone else.

This shit is perverse. Not only does it destabilize the economy, it's literally skimming money off the top of the real economy to line the pockets of a few wealthy investors and traders who, speaking from an economic perspective are dead weight. (and then they complain about welfare...)

That 0.01 is NOT taken from somewhere else. It is "generated" but generated from nothing. It is the air in the bubble and then it bursts. We had this long before, the great depression was build on it. EVERYONE speculated. And LOTS of money was being generated it seemed, but where did it come from? Nowhere.

You might have heard of the phrase "your ship coming in". Where does it come from?

At least in part from the old dutch practice of funding the sailing of a cargo ship by writing out shares. Anyone could fund some money to build/outfit a ship and would in turn get a share of the profits it would generate on its voyage. This was a long term investment as a voyage to the far east could take 2 or more years. It was a also risky, you could build a bridge to the far east out of all the lost ships (oh okay, you can't but it sounds dramatic).

Now say that I took a share of 100 florins (a shitload of money but a nice round number to work with). I watch the ship sail and hope that it will come back in 2 years time with a fat cargo of spices that will trade for a fortune. My ship will have come in. Or it will sink.

BUT this ship does not exist in a void. It will encounter other vessels. Say that six months out it has crossed the horn of Africa. A seriously risky part of the journey. It comes across another ship making its way back and this ship reports what has happened to Holland. What happens to my share? Well nothing EXCEPT that SOMEONE might be willing to pay me more then 100 florins for it because the risk of it failing has now been reduced. My share has increased in POTENTIAL value. Someone with 200 florins might buy my share. I get a lower but certain profit while that person will gain less of a profit IF the ship comes in but has a higher chance of it then I did.

Other factors can add or substract from this. Say that it has been a calm year at sea and I get news that dozens of ships are making their way back. The price of spices will fall. Less risk of no return but less profit. Or say that nobody has yet reported on my ship at all. Risk has sky rocketed that it has sunk and my share is without value. Might I sell it lower?

THAT is stock market speculation. Betting on the POTENTIAL value of something. The problem is NOT with the speculation itself. The problem is when the speculation starts to be based on nothing. Those ships need to build, to be sailing, to be buying and selling cargo in order for there to be anything to speculate on. And that seems to get forgotten.

The speculation is no longer about the chances of the ship making it with a good cargo but on the speculation itself. Speculators no longer follow the shipping news but share prices themselves.

Take the recent price drop of BP shares. Why? Because of the oil spill? The company makes 60+ million profit PER DAY! The cost of the oil spill are spare change. Yes it will hurt their bottom line a bit but it is really just the cost of doing business. There should be no selling going on because the company is at no risk. Without speculators, there would be no selling going on. No long-term investor would have a reaosn to sell. Not buy perhaps but not sell since selling when a stock is going down means you are loosing money. Only the short term speculators have to sell because they can't afford to simply wait out their investment and need their money now.

We have allowed the stock market and the banks to turn themselves into "THE economy". A bank should be a service provider that real business makes use of. The same a law firm or cleaning company. Instead they have come to think of themselves as the most important part, the very engine of the economy. It is silly.

Imagine this. A justice system is part of civilization right? But when you consider the justice system to BE civilization, I think you would not like the results.

Don't confuse the means with the end. The tool with the goal.

There is nothing wrong with speculation, there is something wrong with

The asset that is moved is exactly the same as it was before, but its price is now $100 instead of $80. So you have in fact just created inflation.

When the trucker moves the widget from the factory to the store, he changes its value by moving it from the place of creation to the place of use. Any student of economics knows that major economic leaps have taken place when the costs of this have reduced - from carts to canals, from canals to railways. This is because there are real costs involved; you can regard the energy and investment in moving goods as being exactly as much part of their manufacture as pressing or welding. But the electronic transfer of the stock market transfers ownership at negligible cost and therefore adds no value, so any price increase is simple inflation.

This is exactly what has happened to the economy: house prices inflated, share prices inflated, but the actual value of the underlying assets barely increased. We are now trying to reduce a debt which is purely the difference between perceived value (what people will buy things for) and their inflated value.

The fact that people like you believe the nonsense you have posted is the underlying fact behind the financial crisis.

The value an individual places on a good has little economic meaning, except in terms of purchasing decisions. You might individually value my CD player at $1,000,000. But that means absolutely nothing to the economy, unless you actually buy it. That is the only thing the economy sees, and that is the only way to measure actual economic value: either what you paid for it, or what you can show others are willing to pay for it. Anything else is empty theorizing. And (I believe) that is what GP is arguing: all that speculating left a huge gap between "theoretical value" and actual economic worth. That is when "market corrections" occur, just as we saw. (Note the word "correction": it means things are being re-evaluated closer to their actual economic worth.)

There are only two ways to add actual value to the economy: add something of concrete worth -- such as a good or service -- to the pool of goods and services that make up the economy, or improve something that is already in that economic pool, in such a way that it is now worth more and commands a higher price. Those are the only kinds of "value" that an economy actually respects.

If you simply add numbers (fiat money) to the economic pool as in your example, you are not creating economic value, you are creating inflation.

Despite claims to the contrary by government and financiers, actual economic value is not created -- real growth of the economy does not occur -- as a result of speculative trading. There is a reason it is called "trading". You may value that stock at $100, but if you move alone, others are only going to pay you $80 for it. If a market rush occurs and they all suddenly start paying $100 instead, you have not created money, what you have created is a "bubble": a discrepancy between theoretical valuation and actual economic worth. (Which, if it persists, is inflation.) You have added exactly zero to the economy, because no additional goods or services have been introduced, and nothing has been improved to a state of higher real economic value. You have only changed the numbers.

Some people can grow rich by working the edges of these bubbles, speculating on price transitions. But just as GP said, the real money simply comes from other people: the losers of the same game. It really does add nothing to the overall economy except empty numbers... and as we have seen very clearly in the last couple of years, the numbers really are empty. They do not reflect economic reality.

In case you hadn't noticed, Keynesian economics has been disproven many times over. If I were you, I would start paying attention to those of the Austrian school, who predicted, clearly, publicly, and well in advance -- you can find old videos of Peter Schiff and Ron Paul on YouTube if you need convincing -- just exactly the economic situation we have seen this last year or two. In fact, there is a very good compilation, called "Peter Schiff Was Right", showing clips from TV shows a few years ago in which Peter Schiff disagrees with the "experts" on the economy. They even laughed at him. But as it turned out he was exactly right, and the others were dead wrong. This is no coincidence: he (and Paul, and others of the Austrian school) explained not only what was going to happen but also why. It's all right there for everybody to see.

In case you hadn't noticed, Keynesian economics has been disproven many times over. If I were you, I would start paying attention to those of the Austrian school, who predicted, clearly, publicly, and well in advance -- you can find old videos of Peter Schiff and Ron Paul on YouTube if you need convincing -- just exactly the economic situation we have seen this last year or two. In fact, there is a very good compilation, called "Peter Schiff Was Right", showing clips from TV shows a few years ago in which Peter Schiff disagrees with the "experts" on the economy. They even laughed at him. But as it turned out he was exactly right, and the others were dead wrong. This is no coincidence: he (and Paul, and others of the Austrian school) explained not only what was going to happen but also why. It's all right there for everybody to see.

How much is "Peter Schiff Was Right" related to the prophesies of Nostradamus? He predicted the market crash, etc years ago, but the longer you stretch out your claims, the more likely they are to be "proven correct"...especially if they are vague to begin with (were his claims vague?). I can claim now that the "recovery" we are in is not real and that the market is due for another crash and be proven right eventually...might take another 20 years though. I also "predicted" the market crash back in 2006/2007, but didn't have any particular media outlet or personal conviction for it to be noted. I'm thinking he was the contrarian naysayer that popped up at just the right time to be proven correct...I'm sure you can find his analogue from the early 90's, except nobody remembers him because he was not "proven correct".

Alcoa Inc. in May 2008 at 36$, which seems to have dropped down permanently to around 12$. Do you really think that yearly dividends of some say 5%/year would make up for the risk you take that your equity drops 300% overnight and stays there? You'd have to wait a lot of years until you'd have recouped that loss.

300%!!!... nope.. $36 down to $12 is a 66% drop. a 300% drop would imply that you would OWE $72 for each share....

Better yet, tax the earnings as gambling winnings, not capital gains. Unless they're actually investing (taking significant risks with capital) in the real economy, I don't see why we should reward them with a tax rate below normal income taxes from sweat-of-the-brow work.

Standard Oil, Triangle Shirtwaist Fire, Pullman Strike, and the Pinkerton Militia. Now shut the fuck up and crawl back into your cave of voluntary ignorance while the people that didn't get a D in US History talk about how not to avoid our past mistakes rather than desperately try to repeat them as though 100 hour child-labour using workweeks where you were locked inside a building with no windows or fire suppression systems are something to idealise.

Every time the free market fundamentalists start their proselytizing, we need to remind them where their religion inevitably leads. Randroids are as bad as (and have a great deal in common with) Marxists, in their total inability to separate their belief in what should happen according to their ideals from what actually happens in the real world.

Yes, we did, in fact we had an UTTERLY free market. The government did just about fuck all back then except enforce...

A) The gold standard, used for a good while but truly made universal with the Gold Standard act of 1900, jright around when most of the worst of what I listed occurred. By the way how would you plan to solve the problem of gold scarcity? Do you plan on enforcing some kind of population limit? We went off the gold standard partially because there just wasn't enough gold. Also not as an argume

Communism works, but it doesn't scale. A dozen or a few dozen people can live that way and be fine. A few hundred can't- greed sets in (or the self-selection breaks down). My hypothesis is it breaks down around the time you can't have a personal relationship with most of the other members- its a lot easier to not give a fuck about someone you don't know well.

Laisse Faire capitalism is much the same- it can work among a small self selected group, but doesn't scale up without major abuses. What you want is something in the middle.

Microsoft's monopoly appears to have become limited to home and small business PC operating systems. What is Microsoft's market share in video game consoles? In MP3 players? In smartphone operating systems? In server operating systems? In web browsers, even among users of its own desktop operating system? The widely publicized antitrust lawsuit covered the use of a desktop monopoly to build a web browser monopoly. But now, Internet Explorer is right on the verge of losing its majority, and though it will st

No, the wealth would spread around to anyone who was willing to take a risk and was successful.

And who is it who has the excess resources necessary to take a risk? Oh yeah, the rich. If they risk a lot of money, and lose it, they can fall back on their reserves and try again next year. The rest of us can't afford to risk very much, since failure would cost us our livelihood. That's why the rich tend to get richer, and the poor tend to stay poor.

Nah, look at the successful people in history, and see that almost all of them got helped off to a great start in life by wealthy parents. Then notice that the news stories are all about the tiny few who made it in spite of the lack of advantages, precisely because it is surprising and rare.

A large quotient of luck. Bill Gates had average business savvy, but happened to be in the right time at the right place. P.T. Barnum managed to get rich because the schemes he cooked up happened to work, against every prevailing wisdom of the day.

If you want to see how luck plays a very large role in getting rich, check out the follow-up ventures of people who strike it rich - Paul Allen being the poster boy for that. Yes, there's a good chunk of skill, intelligence, hard work and sociopathy involved - but to argue that anyone who has the traits will get rich is ignorant.

You're telling the story of the exceptions. That's precisely who everyone writes about and finds interesting. Most wealthy people throughout history are inheritors. Families often keep their wealth through 4 or 5 generations, so for every one 'real' success, you have 30-50 wealthy people who achieve success only because of the helping hand of their ancestors.

Bill Gates could afford to drop out of Harvard for something that looked better. That's the typical situation for most of our wealthyest. Surely, if Warren Buffett's dad had sent him to an Ivy League school, it would have been with the understanding that that was THE big break and Warren needed to do everything he could to maximise it, but Warren's the exception. Note carefully what I am saying here. It's not just that most of our richest get starting conditions such as ivy league schools, it's that they ge

A large quotient of luck. Bill Gates had average business savvy, but happened to be in the right time at the right place.

Bill's family was rich. His mother was on the national board of the United Way - as was IBM's CEO. She put the two together.So, yes Bill was "in the right place at the right time" - but the only reason he arrived at the right place was because his parents were loaded.

Gambling at the stock market, on the other hand, is actually harmful to the economy and thus should not be rewarded.

It generates liquidity for the market, which benefits everyone through efficiency. The more shares that get traded, the closer the market makers can place the buy and sell prices to make the same profit. That means both buyers and sellers are getting better deals.

Basically, the gamblers subsidize the price that the non-gamblers pay for stock. In exchange, they get a chance for larger returns.

You should read up on the free market. What we have is not a free market. All the regulations you support are there to attempt to fix problems caused by yet other regulations.

This argument is just silly. A regulation-free market is just another name for anarchy. You wish you had more money than that other trader? No problem, shoot him and take his money, or kidnap his kids and slit their throats unless he agrees to buy them back from you. Don't want something similar to happen to you? No problem, hire a private army of mercenaries to protect yourself. One of your mercenaries is getting a bit ambitious, and sneaking into your room to murder you in the night? Tough, you should have hired a more reliable mercenary.

Regulations are there so that people can conduct their business with at least some confidence that they won't be completely screwed over by every other actor in the market at the first opportunity. Without that confidence, people simply wouldn't trade -- they'd keep all of their money in a locked box in their basement, and spend it mainly on armed guards, and there would be no market, "free" or otherwise.

Yes, some regulations are no doubt unnecessary. But to say that all regulations are only "there to attempt to fix the problems caused by yet other regulations" is to throw out the baby with the bathwater.

wish people would pick the denomination that pleases them, worship at its altar if they like, and then realize how pointless it is to endlessly debate non-resolvable religious issues

Well, libertarians have Rand, and hardcore socialists have Marx. Convincing them that their beliefs are fundamentally religious is tricky, however.

The problem or the religious element is the exclusive either-or thinking. For example, I myself tend towards libertarian philosophy. Specifically, I believe that the only legitimate purposes of government are defense, law enforcement, and public works. The only legitimate purpose of law enforcement is to prevent one person from using force or fraud to deprive another person of his/her inalienable rights. There are a tremendous number of laws that would be repealed if we stuck to these principles.

Exactly; especially when taxpayers worldwide are free to pay billions to revive banks and companies are free to take shortcuts every way they want (if things get really bad, there is always chapter 11).

What we have now is exactly what we were told dishing out the billions of dollars would fix.

Well, it hasn't fixed it. In fact, the vast majority of new jobs are government jobs, which actually subtract from the economy, not add to it. It isn't hard to argue that the problem is now worse than it would have been had we simply let things collapse. It's nearly impossible to prove, since we didn't do it that way, but it's clear the bail-outs didn't work as promised. Though the talking heads will keep saying it did - you know the old saying: repeat a lie often enough, and pretty soon everyone will believe it.

There are a lot of people who believe that had we let the fools fail, other companies would have taken up the slack (this actually happened in the areas the Fed didn't deem important enough to save). For about the same cost in jobs we would have seen a rebound and a much more stable, if poorer in the short term, economy.

Bullshit. The free market is what led us to the brink of economic collapse. Short term trading is probably the largest factor in the rather routine occurrence of market failures. Because the average period for holding a stock is around 6 months, there's no incentive for corporations to look any further into the future. Even when the risk is terribly obvious they don't do anything to avert it. There's been a steady drumbeat in recent decades for fewer dividends and more growth. The problem is that dividends are paid to investors as a way of keeping them around, and as it turns out it's a lot harder to have steady growth and a regular dividend than it is to grow for periods.

And actually you've got it backwards, if you've got a massive portfolio then you should be required to wait longer than smaller investors. Small investors cause far fewer problems in this respect that institutional ones do. They can do crazy things like sell a portion of their holdings triggering a panic, then buy them back knowing what the price will be in a few moments time. The suggestion you're making that they don't harm everybody else is ultimately bullshit.

Bullshit. The free market is what led us to the brink of economic collapse.

- out of the mouth of a guy who looks like does not even understand what money actually is.

You haven't had free market in banking or money supply economics or government spending economics or borrowing economics and the entire debt based economy for decades, starting mostly since the creation of the Fed. What Free Market are you speaking of? The 'Free Market' where the money is printed with no regard to the actual production behind it? The 'Free Market' where Government nurtures Monopolies into existence just to make sure politicians have a never ending money flow for their campaigns? 'Free Market' where Government regulates competition out of existence on the whims of the Monopolies it creates? 'Free Market' that does not allow failures actually to die off and does not allow small competition to step in and replace the failing businesses? 'Free Market' where Government is in business of insurance of every kind, including every possible loan? 'Free Market' where Government pushes incentives to live on debt? 'Free Market' with a fundamental believe that consuming is the main engine of Economy?

Where is this magical 'Free Market' that caused the economic collapse?

This Free Market is nowhere to be found.

The banks that are in business of High Frequency Trading are Monopolies created and abetted by the Government that keeps them being monopolies by providing free money, by creating regulations that kill off competition.

The FDIC - Government's corporation that insures your funds in a private bank - that's the reason for the banks not to care about actually doing right by their customers and getting into risky behaviors like gambling with High Frequency Trading tools.

A person spends less time thinking about the bank they will put money into than about what kind of a vacuum cleaner they'll be buying.

If the government did not provide free money and insurance to banks, if it did not create impossible to get through regulations that only prevent small competition from entering the business of hedging funds or banking but never stops the giant monopolies who already have the money and man power to overcome any and all regulations to continue their business, then banks would actually have to earn the trust of customers.

Banks would have to insure themselves with private insurance companies, who would require a sane amount of capital to be held at a bank and would not allow a bank to over-leverage itself into bankruptcy in case some investments go bad.

Government is the engine of the economic collapse that is happening. Government prints and borrows money, sets insane interest rates, chooses the friends to become giant monopolies, creates regulations that kill off small competition, kills small business by taking away money from people through income tax system that prevents savings and small business from appearing. Giant monopolies have all of the moral hazard of the Government insurance and Free Money.

The monopolies that are manufacturers, also created with government involvement only need an opportunity to shift their giant economies of scale to zones with least production costs. USSR fell apart, the world opened up and the opportunity presented itself - China. The Government, instead of competing with China by reducing regulations, by reducing or completely removing income taxes that prevent small investors from saving and creating small businesses, just started borrowing and printing more. Government does not create anything except inflation and competition killing regulations.

Just like with the preventable incident with the BP/Transocean/Halliburton/MMS oil spill, you can see the government's actions. There are none. They cannot do anything in a crisis.

Same thing with economy - they can't do anything but print and borrow more money and create more regulations. They can make fake census jobs, but those are not productive jobs, they don't reduce the trade deficit.

Government is on its way destroying the economy, and the useful idiots like you still believe what they have been fed their entire life: this is the Free Market.

The "free market" existed before the Fed, and yet you seem to gloss over the financial disasters during that time. The free market existed in England, and there were a number of economic travesties there too.

Economic anarchy is not the answer. PEOPLE ARE ASSHOLES. In economic anarchy, the assholes will rule because they don't give a shit about anyone else. They care about money, and go to any lengths possible to get it.

Free Marketers/Economic Anarchists seem to operate in this idealized world where people w

disasters? Do you mean the kind of disaster that brought up the standard of living for everybody across the board?

For who? For us? Or for the people who suffered from things like the Union Carbide disaster in India? Or the pollution fueled economy of China where we get all the cheap crap we want? I suppose wearing filtration masks are a big step up.

Or how about a few depressions, which always hit the middle and lower classes harder than those on top of the pile. For example, the late 1800's saw quite a lovely depression. No Fed necessary.

The only reason the standard of living has increased for everyone overall is becau

no no no, you don't turn this around on me, I was replying to a post that declared that US economy failures are due to Free Market failures, I am showing that there is no Free Market and thus the Free Market problem is a red herring, nothing more than that.

Would I prefer Free Market to what is happening now? Surely. However that is not the question at hand, the question is: what is failing. Saying that Free Market is failing is disingenuous at best because there is very little Free Market what is happenin

I loath the idea of a free market. However if in the example of a large, institutional investor selling, triggering a panic and then buying back when the stock is at a lower point, you must admit that the little guy then has the opportunity to buy at the low point as well. What I am getting at is that the activities in the market may not be so unfair to the small investor but the entire idea of a stock market is evil to the class of peo

Because the market *should* be protected? Why you ask? Because the government has pushed people into investing in the market by way of tax-deductible retirement funds such as 401k and IRAs.

Personally, I think the tax-deductible retirement accounts are a scam to get people investing more money in the stock market. My preference would be to get rid of this ridiculous concept, but that's not going to happen. So, since the government has coerced the general public into investing in a market they have no clue about, the government should do what it can to protect that market somehow.

What we have now is essentially a government which encourages (by way of a 30% discount) people to hand their money over to blackjack players to gamble with their money.

Quants are fine as long as people are investing with that money. The problem is, the general public can't compete -- they're just along for the ride.

Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market? I'm not sure I buy it completely either, but I do believe there are some benefits.

Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market? I'm not sure I buy it completely either, but I do believe there are some benefits.

In theory but the fact of the matter is that when others start to sell or buy, everyone starts to do the same. These trading strategies actually increase the volatility of the market.

I don't think it does much for market irrationality. It does provide liquidity, though, which is good in reasonable amounts: means that if you want to buy or sell a stock right now, you don't have to wait for another long-term investor who wants to make the opposite transaction, but can buy from or sell to one of these people who are always churning their holdings.

It can be a problem if this sort of statistical-trading volume swamps the "real" trading, though. Ideally an exchange is supposed to send price signals that reflect some sort of external supply and demand, but if, say, only 5% of the market participants are normal market participants, and 95% are trading with 20-minute horizons based on statistical models, you've got a weird feedback-loop market that reacts mostly to itself.

That may be the rationale, but it doesn't. The assumption people make is that short term traders are trading upon the actual realism of the price, when they're doing no such thing. Typically people that trade in intervals of less than 6 months are doing so called "technical analysis" which is ironic since there's no technical knowledge required nor is there any analysis required. Basically they look at a graph and imagine what it means. And since there's a lot of people doing so it becomes a sort of truth.

Isn't the rationale something along the lines that this kind of high volume, quick selling flattens out the (inherent) irrationality of the market?

I really think the premise of this is simply to beat everybody to the punch by a few seconds. It is expected that good and bad news moves the market; by moving first, you get money. They're not trying to make better decisions, just a little faster. It's not an inherently productive activity, and it's a pity so many of our brightest minds are wasting their lives gaming the system (taking big slices of pie without helping make more). But I wouldn't pretend to have the solution.

Short term trading generally creates market liquidity, which is necessary for the market to function even remotely efficiently.

Without liquidity, we would likely see wild fluctuations in the prices of stocks, creating an even more unstable and unsure environment. Take a read of the wikipedia page (http://en.wikipedia.org/wiki/Market_liquidity) to get a better understanding. This behaviour can be seen today in exchanges where trading volumes are low and on stocks with low trading volumes (penny stocks, etc). The concept follows over to many things in life. Imagine if you were required to keep any object your purchased for a minimum amount of time before reselling it (house, car, iPod, etc). You would lose control of selling it at a time that works best for you. Very likely, you'd stop buying. This is fine for non-essential items, but the same applies for base needs like food, water and fuel. Crazy fluctuations in those items costs would likely lead to some pretty bad problems. Likely, strategies for flattening out the craziness would appear, and they would work by creating liquidity somewhere in the system that wasn't regulated.

If you crippled liquidity, you'd likely get *more* insane bullshit, not less.

This is a completely bogus statement. It is the existence of a stock market that creates liquidity, not short term trading. Otherwise, how did capitalism ever manage to work in the days when all trades were recorded in ledgers and not complete till the cash was handed over?

Originally, the stock market was not a form of gambling but a form of insurance. Investors in trade voyages in the days of sail and marine anarchy expected that some ships would not come back, therefore they wanted to be able to invest in multiple voyages. Joint stock companies formed to carry out a voyage would then sell shares, spreading the risk. (They did this at Lloyd's Coffee House in London.) The sale of shares meant that the money they had invested in the voyage came back to them before the voyage was complete, thus creating liquidity (i.e. the joint stock owners had cash again to invest in new voyages before the first ones returned).

Short term trading is purely gambling, but does not necessarily create any more liquidity than long term investment. Hence my observation that your comment is bogus.

There is an alternatively and it just might address the capital gains issue. We tax capital gains at the same rate no matter how long you keep the investment. Why not have a sliding scale that bases the capital gains tax rate on how long you hold on to the stock. Suggested tax rates. At the same time, investors are always crying that capital rates are too high. With this scheme, they would be in control of what rate their investments would be taxed at.

You could even put the tax rates on a continuous scale that negates any advantage to holding on to an investment just long enough to meet a benchmark. Yes, short term investments would be taxed at a confiscatory rate, but that is the general idea. We want to slow down the rate of trading. At the same time, investors are always crying that the capital gains rate is too high. This would put them in control of what tax rate their investments is taxed at. All they need to do is to hold on to investments long enough. This scheme would also favor the little guy who probably holds on to investments for a longer time.

We don't tax all capital gains at the same rate already. There are already two buckets, one for investments held more than a year, and one for less. You're just suggesting more buckets, and it is actually quite reasonable to think we might achieve that.

Indeed. Imagine once the suits decide that this is the best tool for the job, and quite a few of them have this system. Then, say, a calculated 1.1% drop in stock price for a certain stock would cause a mass short sale of it, which would cause the stock to fall through the floor, which would trigger nervousness for the sector the stock was in, which would cause >1% drops for all stocks there, which would...

This is pretty much what happened a few weeks ago when stocks inexplicably dropped to near zero,

Yes. If you consider the stock market to be a tool to enable investment and growth, it's fairly substantially broken. Not totally useless in achieving those ends, by any means, but certainly broken when considered in that context.

Since you or I don't have the power to fix the system, it seems a lot more prudent to exploit it than to ignore it.

Not really, it's more like the sales opening rush except it happens all day long. The fastest gets something that's almost a guaranteed prize, but he has to be faster than everyone else. If he gets there just a little too late, the opportunity is lost. But that should be possible to deduct from the current stock movement if you're too late or not. However, I was under the impression that this was done to death already.

But is not all investment gambling? The fact that you hope to make a profit in 20 minutes instead of 20 months doesn't really change the gambling aspect.

I'm not sure where the true boundary between investing and gambling falls, but in any case 20 minute vs 20 month outlooks seem to be two different types of investing that don't really interfere anyways. Whether it takes 30 seconds or 3 minutes for the quarterly report to impact the stock price doesn't change what it's going to be two years from now. Th

Investing is not necessarily gambling. Gambling is based on odds and randomness. Investing is usually based on performance of companies, which is not random. Yes there is speculation in investing but at its foundation most (traditional) investing is based on how well companies do. Gambling is based on chance.

Gambling is based on odds and randomness. Investing is usually based on performance of companies, which is not random. Yes there is speculation in investing but at its foundation most (traditional) investing is based on how well companies do. Gambling is based on chance.

Depends on what type of gambling you're talking about. Playing slot machines or roulette -- yeah, that's chance and nothing more. But playing poker, or betting on a horse race, is not purely on dependent on chance by any means. A good poker player can clean up over a bad one even if he has bad luck with the hands he's dealt. Horse-race bettors who know about horses, jockeys, and tracks, and who understand the interactions between them, will make a lot more money than those who don't. Obviously, there's

There's some truth there. But I think that betting that Company A is going to make good decisions and deliver value is very different from betting that the market will react a certain way to a certain piece of news in the next five minutes. One is betting on the company, the other is betting on the market itself (which is only supposed to be a representation of the aggregate value of certain companies).

So, what's wrong with this picture? You buy/sell things that you expect to move by 1% in the next 20 minutes, and you then magically trade out of them after 20 minutes? How exactly are you figuring exit prices on things that have an implied instant annual volatility of 70%+? What's your cost to hedge your overall market exposure? How much slip will you take to scale this to the point you can actually make real money?

Historically bots work for a few weeks or months at best, then the market changes and they have to be scrapped (there is generally little that is worth salvaging). If this works better then it will be a gold mine for those who have it, though I have a sneaking suspicion meat-bag strategies will adjust to compensate for it.

Tax gains depending on the time stock was held. Held less than 1 day: 99% tax rate. Held more than 1 year: income tax rate. Interpolate. Extremely short term "predictions" on the stock market have no value to society and should not be rewarded.

As it is now in the U.S., anything held less than 1 year is considered income, whereas over 1 year is capital gains. Pretty big difference in percentage.

This type of day-trading provides absolutely no value to the economy and should be regulated to death. Also, I have a hard time believing it would work in the long term, as the news is a lagging indicator 90+% of the time. It might work for shorting in that respect... but even that would be too late and high risk.

All these quant systems seem to do is increase volatility at the expense of the market establishing a general direction.

I'm all for an IRS withholding of 1% on sales of assets held less than a week, and I am a fairly active trader.

The problem is that if it's too high volume, it both makes and is the market. If everyone's running a statistical model that says that Event X will cause a stock price increase, the stock price will increase, even if it wouldn't have otherwise.

I assume you've never heard of "dividends." They're what used to drive investments prior to computers. Back in the day people would rarely buy and sell on a time period of less than a couple years, because it was somewhat difficult to get in and out efficiently. Hell, I remember even in the 80s, you'd typically be restricted to only checking prices once a day. Well, unless you were a broker or were glued to the TV.

What that does is decrease the cut that the matchmakers get for brokering the deal. However it doesn't harm the market, there are still stocks, most notably Berkshire Hathaway, which are barely liquid and they do just fine. You just Don't expect to trade it immediately. I know it's terrible to possibly have to wait an hour or two, but it's worth it if it cuts these jack ass jackal cheats out of the picture.

And this extra liquidity is a benefit? I could argue that even without these automated bots there is no shortage of liquidity in modern markets.

One of the greatest benefits of liquidity is supposed to be more stable price formation. Unfortunately I cannot believe in the current system where on a bad day swings can be over 50% down and back up, and on a good day stocks bounce around in 5-10% bracket. No company value can move that much during one day, it's all speculation and volatility of these systems.

Stock market needs to go back to the basics where you own a company rather than zero sum lottery tickets.

Sure, it "makes a market" -- in that it increases the probability that someone will be available willing to buy at some price when someone is willing to sell, and vice versa -- but it does so by divorcing that market from the thing that make markets efficient at realizing utility, to wit, the proximity between the market actors and the costs of production and/or benefits of direct use of the things being bought and sold.

This type of day-trading provides absolutely no value to the economy and should be regulated to death.

Apart from the issue of whether this is true or not, I am curious why are people so quick to support sacrificing economic liberties (such as my freedom to buy and sell whatever I want, whenever I want) the moment the first hint enters their head that a specific activity somehow "provides absolutely no value to the economy". Are you really 100% sure that it doesn't? I think you are not, but even if you are

All these quant systems seem to do is increase volatility at the expense of the market establishing a general direction.

WTF? If a market has a "general direction" it is broken. You think it would be better if people stood around saying "IBM is at $100 now, the general direction will take it to $110 in a week, so let's just sit around doing nothing?"

"General direction" is what realtors use to convince people to buy houses: "don't worry, it is going up."

Ars Technica wrote an interesting article about this almost a year ago. What is happening now isn't anything all that new. As several people have already mentioned, yes this is dangerous because these tools trade in extremely large sums. Slashdot even covered United Airlines stock dropping from $12 to $3 when the news crawler for one of these tools thought an old story was new and the tool proceeded to dump its entire United holdings causing a massive sell off by other investors.
http://arstechnica.com/tech-policy/news/2009/07/-it-sounds-like-something.ars [arstechnica.com]
http://tech.slashdot.org/tech/08/09/10/203233.shtml [slashdot.org]

Slashdot even covered United Airlines stock dropping from $12 to $3 when the news crawler for one of these tools thought an old story was new and the tool proceeded to dump its entire United holdings causing a massive sell off by other investors.

You could see that as an argument these tools harm the economy (i.e. decrease overall growth). But if the United Airlines price sprang back fairly quickly, and the people placing unjustified reliance on faulty models took a bath practically giving away valuable s

What I really meant to get across was that because of the volumes that these systems need to trade in to make money, they have the capacity to make very large impacts on the market if they misbehave. Because of this, we should at the very least be aware of them and the dangers that they pose when they misbehave.

Slashdot even covered United Airlines stock dropping from $12 to $3...

You call this "dangerous"? I would love it if one of my stocks dropped 75%, because I would be able to buy more shares at a great price!

There seems to be a lot of people here whining about what would happen if 95% of the market participants were day traders and only 5% were long term investors. Guess what? Those long term investors would love it, because the day traders would create endless opportunities for the long term investors to buy low and sell high.

Essentially all a hacker would have to do to really abuse this system is plant a couple of fake stories on yahoo finance while shorting(or going long I guess) the stock the fake story is about. I doubt that yahoo finance(or any finance web site for that matter) is so secure that they could fend off a horde of attackers motivated by a payday thats potentially in the millions.

other than earning its investors more money over money which didnt produce any goods or services while being generated. water vapor. dud. nada. nothing. paper wealth. then it booms, and real sector pays its price, while the money jugglers have become unrighteously rich.

A trade every 20 minutes would generate an obscene amount of transaction cost. These are the costs associated with stock trading and any successful Trader/Manager team would seek to minimize these things and create a strategy that maximizes gain for the least amount of trades. Given this system is trading so frequently it would seem to assume zero transaction cost. Quite

I would also think that any more than a few of these trading bots would create a market impact that would nullify the advantage eventually.

Its also kind of weird to invest based on information that is not reliable, or not stemming from the fundamentals of a stocks earning potential. Creating portfolios based on glamour, popularity or essentially inefficiency is a disaster waiting to happen. These gimmiks will work until a catastrophe happens, but by then so much more is committed than is was ever prudent and the damage is done. Investing based on artifacts or involving anything you don't understand with your own 2 hemispheres means that you as an individual are being manipulated and you are investing for irrational reasons.

Unless this technique can be balanced or controlled in a risk management context, or understood at a low level to behave in parallel with existing market benchmarks, then only the penultimate fool would see this as responsible investing and not patent gambling and recreation with your surplus funds.

While I see the expectation of any product to magically increase in value over time as fundamentally insane, there are securities that can offer utility in markets. If this kind of information is really that valuable to a majority then it will eventually be securitized. If this is something that only a minority can exploit and is not private information, some Tony Soprano somewhere in the world will call it illegal. And thats the other reason not to bother - because none of the markets are truly open and will never be truly efficient while goverments are waiting to intervene. Maybe there is opportunity in the many small irrationalities of the human mind since the market participants are almost all human. What else could this information harvesting be capturing besides some departure from fundamental consideration? If the fundamentals are considered and reflected in the price, then any other change is short term and technical, to be nullified.

There are HFs using this strategy now using dedicated reuters feeds and trading in microseconds. This means new information is impounded into stock prices well within a second.
In the article they used yahoo news and minute by minute stock data? That's laughable. I suspect the reason for their returns is that they they are indexing the time information arrived, and the price you could trade at that instant incorrectly.
In other words the information arrived at t + 5 seconds, and they execute the trade at the quotes available at time t.
Also I suppose they are not including margin and transaction costs, reasonable slippage, and risk-adjusting their returns?

No, what it means is that you need to run as far away from them as you can possibly get. The only thing that Wall Street does more efficiently is fleece individual investors. Now they've gotten so efficient that they've managed to fleece tax payers into thinking that it's a better deal to pay more to fix the mortgage crisis than it would cost to just buy up every troubled mortgage in the country.